---

SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549

FORM 10-QSB

[X] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934. 
For the quarterly period ended: March 31, 2006

OR

[_] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934. 
For the transition period from: to

Commission File Number: 000-030813

AlphaRx, Inc.(Name of Small Business Issuer in its Charter)

|Delaware                            | 98-0177440                              
|----------------------------------- | ----------------------------------------
|(State
    or other jurisdiction of | (I.R.S.
    Employer Identification No.)
|incorporation or organization)      |                                         

168 Konrad Crescent, Suite 200 
Markham, Ontario, Canada L3R 9T9 
(Address of principal executive offices)

Registrant's telephone number, including area
code: (905) 479-3245

Securities registered pursuant to Section 12(b)
of the Act: None

Securities registered pursuant to Section 12(g)
of the Act: 
Common Stock, $.0001 par value 
(Title of Class)

Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

The number of outstanding shares of registrant's Common Stock
on May 11, 2006 was 57,508,112.

Transitional Small Business Disclosure Format. Yes [ ] No [X]

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ALPHARX, INC.
FORM 10-QSB

MARCH 31, 2006

TABLE OF CONTENTS

|                                                                                 |   
|-------------------------------------------------------------------------------- | --
|Unaudited Interim
    Consolidated Balance Sheets as of March 31                 |   
|2006 and September 30, 2005                                                      | 3 
|                                                                                 |   
|Unaudited Interim
    Consolidated Statements of Operations for the six months   |   
|ended March 31, 2006 and March 31, 2005                                          | 4 
|                                                                                 |   
|Unaudited Interim
    Consolidated Statements of Operations for the three months |   
|ended March 31, 2006 and March 31, 2005                                          | 5 
|                                                                                 |   
|Unaudited Interim
    Consolidated Statements of Changes in Shareholders' Equity |   
|(Deficiency)                                                                     | 6 
|                                                                                 |   
|Unaudited Interim
    Consolidated Statements of Cash Flow for the six months    |   
|ended March 31, 2006 and March 31, 2005                                          | 7 
|                                                                                 |   
|Condensed Notes to
    Unaudited Interim Consolidated Financial Statements       | 8 
|                                                                                 |   
|Management's
    Discussion and Analysis of Financial Condition and Plan         | 14
|of
    Operation                                                                 |   
|                                                                                 |   
|Other Information                                                                | 19

2

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ALPHARx, INC.
INTERIM CONSOLIDATED BALANCE SHEETS 
AS AT MARCH 31, 2006 AND SEPTEMBER 30,2005 
(UNAUDITED)

|                                                       |   | March 31,    | September 30,
|------------------------------------------------------ | - | ------------ | -------------
|                                                       |   | 2006         |              
|CURRENT ASSETS                                         |   |              |              
|                                                       |   |              |              
|Cash and Cash Equivalents                              | $ | 34,316       | $            
|Accounts Receivable, net                               |   | 81,179       |              
|Prepaid Expenses                                       |   | 6,680        |              
|Inventory                                              |   | -            |              
|                                                       |   |              |              
|TOTAL CURRENT ASSETS                                   |   | 122,175      |              
|                                                       |   |              |              
|                                                       |   |              |              
|PROPERTY, PLANT & EQUIPMENT, net                       |   | 199,103      |              
|OTHER ASSETS                                           |   |              |              
|Licensing Right (Note 3)                               |   | 1            |              
|                                                       |   |              |              
|TOTAL ASSETS                                           |   | 321,279      |              
|                                                       |   |              |              
|CURRENT LIABILITIES                                    |   |              |              
|Accounts Payable and
    Accrued Liabilities           |   | 792,856      |              
|Notes Payable, net of
    discount (Note 4)            |   | 23,399       |              
|Litigation Liabilities
    (Note 6 )                   |   | 25,000       |              
|TOTAL CURRENT LIABILITIES                              |   | 841,255      |              
|                                                       |   |              |              
|                                                       |   |              |              
|SHAREHOLDERS' EQUITY (DEFICIENCY)                      |   |              |              
|Common Stock: $ 0.0001 par value,                      |   |              |              
|Authorized 250,000,000
    shares; issued and          |   |              |              
|outstanding March 31, 2006
    and September 30, 2005: |   | 5,752        |              
|57,508,112                                             |   |              |              
|Additional paid-in capital                             |   | 13,227,243   |              
|Deficit                                                |   | (13,752,971) |              
|                                                       |   |              |              
|TOTAL SHAREHOLDERS' EQUITY (DEFICIENCY)                |   | (519,976)    |              
|                                                       |   |              |              
|TOTAL LIABILITIES AND SHAREHOLDERS'                    | $ | 321,279      | $            
|EQUITY (DEFICIENCY)                                    |   |              |              

See condensed notes to consolidated financial statements

3

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ALPHARx, INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED MARCH 31, 2006 AND 2005 
(UNAUDITED)

|Six months ended March 31,          |             | 2006        |             | 2005       
|----------------------------------- | ----------- | ----------- | ----------- | -----------
|                                    |             |             |             |            
|SALES                               | $           | 22,003      | $ 25,146   
|LICENSE FEES AND ROYALTIES (Note 5) |             | 107,184     |             | -          
|                                    |             |             |             |            
|TOTAL REVENUES                      |             | 129,187     |             | 25,146     
|                                    |             |             |             |            
|COST OF SALES                       |             | 8,919       |             | 11,079     
|                                    |             |             |             |            
|GROSS MARGIN                        |             | 120,268     |             | 14,067     
|                                    |             |             |             |            
|                                    |             |             |             |            
|GENERAL AND ADMINISTRATIVE EXPENSES |             | 369,313     |             | 307,277    
|STOCK BASED COMPENSATION EXPENSE    |             | 607,664     |             | 54,673     
|RESEARCH AND DEVELOPMENT EXPENSES   |             | 807,415     |             | 481,388    
|SALES AND MARKETING EXPENSES        |             | 32,845      |             | 419,576    
|DEPRECIATION                        |             | 33,079      |             | 25,018     
|LOSS FROM OPERATIONS                | (1,730,048) |             | (1,273,865)
|                                    |             |             |             |            
|OTHER INCOME AND EXPENSES           |             |             |             |            
|                                    |             |             |             |            
|Interest Income/(Expense),
    net  |             | (10,979)    |             | 18,087     
|                                    |             |             |             |            
|                                    |             |             |             |            
|LOSS BEFORE INCOME TAXES            | (1,741,027) |             | (1,255,778)
|                                    |             |             |             |            
|INCOME TAX                          |             | -           |             | -          
|                                    |             |             |             |            
|NET LOSS                            | $           | (1,741,027) | $           | (1,255,778)
|                                    |             |             |             |            
|NET LOSS PER COMMON SHARE, BASIC &  |             |             |             |            
|DILUTED                             |             | (0.03)      |             | (0.02)     
|                                    |             |             |             |            
|WEIGHTED AVERAGE NUMBER OF COMMON   |             |             |             |            
|SHARES OUTSTANDING                  |             | 57,508,112  |             | 56,993,521 

See condensed notes to consolidated financial statements

4

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ALPHARx, INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 
(UNAUDITED)

|Three months ended
    March 31,        |   | 2006       |   | 2005      
|--------------------------------------- | - | ---------- | - | ----------
|                                        |   |            |   |           
|SALES                                   | $ | 5,465      | $ | 16,200    
|LICENSE FEES AND
    ROYALTIES (Note 5) |   | 101,910    |   | -         
|                                        |   |            |   |           
|TOTAL REVENUES                          |   | 107,375    |   | 16,200    
|                                        |   |            |   |           
|                                        |   |            |   |           
|COST OF SALES                           |   | 1,483      |   | 6,651     
|                                        |   |            |   |           
|GROSS MARGIN                            |   | 105,892    |   | 9,549     
|                                        |   |            |   |           
|                                        |   |            |   |           
|GENERAL AND
    ADMINISTRATIVE EXPENSES |   | 187,830    |   | 161,809   
|STOCK BASED
    COMPENSATION EXPENSE    |   | 107,853    |   | 54,673    
|RESEARCH AND
    DEVELOPMENT EXPENSES   |   | 453,690    |   | 327,376   
|SALES AND MARKETING
    EXPENSES        |   | 27,370     |   | 271,728   
|DEPRECIATION                            |   | 18,154     |   | 13,568    
|LOSS FROM OPERATIONS                    |   | (689,005)  |   | (819,605) 
|                                        |   |            |   |           
|OTHER INCOME AND
    EXPENSES           |   |            |   |           
|                                        |   |            |   |           
|Interest Income/(Expense), net          |   | (9,569)    |   | 8,261     
|                                        |   |            |   |           
|LOSS BEFORE INCOME TAXES                |   | (698,574)  |   | (811,344) 
|                                        |   |            |   |           
|INCOME TAX                              |   | -          |   | -         
|                                        |   |            |   |           
|NET LOSS                                | $ | (698,574)  | $ | (811,344) 
|                                        |   |            |   |           
|NET LOSS PER COMMON
    SHARE, BASIC &  |   |            |   |           
|DILUTED                                 |   | (0.01)     |   | (0.01)    
|                                        |   |            |   |           
|WEIGHTED AVERAGE
    NUMBER OF COMMON   |   |            |   |           
|SHARES OUTSTANDING                      |   | 57,508,112 |   | 57,508,112
|                                        |   |            |   |           

See condensed notes to consolidated financial statements

5

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ALPHARx, INC.

INTERIM CONSOLIDATED STATEMENTS OF CHANGES 
IN SHAREHOLDERS' EQUITY (DEFICIT) 
(UNAUDITED)

|                        | Common Stock | Additional | Retained    | Total        
|----------------------- | ------------ | ---------- | ----------- | -------------
|                        | Number of    |            | Paid-in     | Earnings     
|                        | Shares       | Amount     | Capital     | (Deficit)    
|                        |              |            |             |              
|Balance as of           |              |            |             |              
|September 30,           |              |            |             |              
|2004                    | 52,304,642   | $5,232     | $9,580,035  | $(7,159,820) 
|                        |              |            |             |              
|Conversion of           |              |            |             |              
|Promissory              |              |            |             |              
|Notes                   | 5,203,470    | 520        | 510,988     |              
|                        |              |            |             |              
|Issuance of             |              |            |             |              
|Stock Options           |              |            |             |              
|for consulting services |              | 62,300     |             | 62,300       
|                        |              |            |             |              
|Stock Based             |              |            |             |              
|compensation expense    |              | 2,009,920  |             | 2,009,920    
|                        |              |            |             |              
|Net Loss for            |              |            |             |              
|the year                |              |            |             | (4,852,124)  
|                        |              |            |             |              
|Balance as of           |              |            |             |              
|September 30,           |              |            |             |              
|2005                    | 57,508,112   | $5,752     | $12,163,243 | $(12,011,944)
|                        |              |            |             |              
|Issuance of             |              |            |             |              
|Stock Options           |              |            |             |              
|for consulting services |              | 111,224    |             | 111,224      
|                        |              |            |             |              
|Stock Based             |              |            |             |              
|compensation expense    |              | 496,440    |             | 496,440      
|                        |              |            |             |              
|Unamortized discount    |              | 456,336    |             | 456,336      
|related to issuance of  |              |            |             |              
|warrants                |              |            |             |              
|                        |              |            |             |              
|Net Loss for            |              |            |             | (1,741,027)  
|the period              |              |            |             |              
|                        |              |            |             |              
|Balance as of           |              |            |             |              
|March 31,               |              |            |             |              
|2006                    | 57,508,112   | $5,752     | $13,227,234 | $(13,752,971)

See condensed notes to consolidated financial statements

6

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ALPHARx, INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS 
FOR THE SIX MONTHS ENDED MARCH 31, 2006 AND 2005 
(UNAUDITED)

|Six months ended March
    31,                                  |   | 2006        |   | 2005       
|--------------------------------------------------------------- | - | ----------- | - | -----------
|                                                                |   |             |   |            
|CASH FLOWS FROM
    OPERATING ACTIVITIES                        |   |             |   |            
|Net
    Loss                                                    | $ | (1,741,027) | $ | (1,255,778)
|Adjustments to reconcile net loss to net cash used in operating |   |             |   |            
|activities:                                                     |   |             |   |            
|Depreciation and amortization                                   |   | 33,079      |   | 25,018     
|Stock based compensation expense                                |   | 496,440     |   | -          
|Options issued for services rendered                            |   | 111,224     |   | 54,673     
|Changes in assets and liabilities:                              |   |             |   |            
|(Increase)/decrease in Inventory                                |   | 81,166      |   | (33,300)   
|(Increase)/decrease in Accounts Receivable                      |   | (39,296)    |   | (4,982)    
|(Increase)/Decrease in Prepaid Expenses                         |   | 10,363      |   | (8,700)    
|Increase in Accounts Payable and Accrued Liabilities            |   | 408,381     |   | 121,307    
|                                                                |   |             |   |            
|NET CASH USED IN
    OPERATING ACTIVITIES                       |   | (639,670)   |   | (1,101,762)
|                                                                |   |             |   |            
|CASH FLOWS FROM
    INVESTING ACTIVITIES                        |   |             |   |            
|                                                                |   |             |   |            
|Purchase of Machinery & Equipment, net of disposals             |   | 793         |   | (30,652)   
|                                                                |   |             |   |            
|NET CASH PROVIDED BY
    (USED IN) INVESTING ACTIVITIES         |   | 793         |   | (30,652)   
|                                                                |   |             |   |            
|CASH FLOWS FROM
    FINANCING ACTIVITIES                        |   |             |   |            
|Discount on issuance of Notes Payable                           |   | 456,336     |   | -          
|Issuance (repayment) of Notes Payable, net of discount          |   | 23,399      |   | (154,932)  
|                                                                |   |             |   |            
|NET CASH PROVIDED BY
    (USED IN) FINANCING ACTIVITIES         |   | 479,735     |   | (154,392)  
|                                                                |   |             |   |            
|NET DECREASE IN CASH                                            |   | (159,142)   |   | (1,286,806)
|                                                                |   |             |   |            
|CASH, and cash
    equivalents, beginning of period             |   | 193,458     |   | 2,856,042  
|                                                                |   |             |   |            
|CASH, and cash
    equivalents, end of period                   | $ | 34,316      | $ | 1,569,236  
|                                                                |   |             |   |            
|                                                                |   |             |   |            
|                                                                |   |             |   |            
|Income Tax Paid                                                 | $ | 0           | $ | 0          
|Interest Paid                                                   | $ | 0           | $ | 0          

See condensed notes to consolidated financial statements

7

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ALPHARX INC. 
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2006 
(UNAUDITED)

NOTE 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form 10-QSB and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of all recurring accruals) considered
necessary for fair presentation have been included. Operating results for the
interim periods are not necessarily indicative of the results that may be
expected for the year ended September 30, 2006. Interim financial statements
should be read in conjunction with the Company's annual audited financial
statements.

NOTE 2. NATURE OF BUSINESS AND GOING CONCERN

ALPHARX, INC. (the Company) was incorporated under the laws
of the State of Delaware on August 7, 1997. The company is an emerging
pharmaceutical company specializing in the formulation of therapeutic products
using proprietary drug delivery technologies. The company was formally known as
LOGIC TECH INTERNATIONAL, INC., and had its corporate name changed during the
fiscal year of 2000.

Effective April 22, 2005 AlphaRx International Holdings Limited (a British
Virgin Island company and a wholly-owned subsidiary of AlphaRx Inc.) entered
into a Joint Venture agreement with Basin Industrial Limited (a British Virgin
Islands Company and a wholly-owned subsidiary of Advance Pharmaceutical Co.
Ltd.). The Joint Venture, AlphaAP Inc., will be involved in manufacturing and
marketing of certain of the Company's existing products and certain future
products in the far east. Alpha AP Inc. remains inactive as of March 31, 2006.

The consolidated financial statements reflect the activities of the Company,
AlphaRx Canada Limited and AlphaRx International Holdings Limited  its wholly
owned subsidiaries. All material inter-company accounts and transactions have
been eliminated.

The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Accordingly, they
do not include any adjustments relating to the realization of the carrying value
of assets or the amounts and classification of liabilities that might be
necessary should the company be unable to continue as a going concern.
Continuance of the company as a going concern is dependent on its future
profitability and on the on-going support of its shareholders, affiliates and
creditors.

NOTE 3. LICENSING RIGHTS

The Company acquired world-wide exclusive commercialization rights for VT-1
from Select Therapeutics Inc. in January 2003 with the intention of
commercializing this drug. Having unsuccessfully attempted to resell these
commercialization rights, they have been written down to a nominal value due
primarily to prohibitive development costs, and the fact that there is no market
for these rights.

NOTE 4. NOTES PAYABLE

The Company issued approximately $469,000 in promissory notes during the six
months ended March 31, 2006. These notes bear interest at 12% per annum and are
repayable on the first anniversary date of issuance. Prepayment of these notes
prior to the first anniversary date is permitted.

8

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In conjunction with these promissory notes, the Company issued warrants. This
in turn required a discount to be established capped at the principal amount of
the promissory notes.

|Promissory Notes
    Issued:      | $469,497 
|--------------------------------- | ---------
|Discount on Promissory
    Notes: | (469,497)
|Interest Accrued                  | 10,238   
|Discount Amortized:               | 13,161   
|                                  |          
|Promissory Notes
    Payable      |          
|March 31, 2006:                   | 23,399   

There remains $456,336 in discount to be amortized over the life of the
promissory notes. See also Note 10  subsequent events for additional new
promissory notes issued subsequent to March 31, 2006.

During the six months ended March 31, 2005, the Company converted $520,347 in
convertible promissory notes into 5,203,470 shares of common stock plus warrants
to purchase 10,406,940 shares of common stock at an exercise price of $0.30 per
share. These warrants expire during September and October, 2007. The remaining
notes outstanding after conversion were repaid with proceeds from the private
placement completed during September, 2004.

NOTE 5. LICENSE FEES

During the three months ended March 31, 2006 the Company generated license
fee revenues for the first time. License fee revenues are recognized under the
following circumstances: Persuasive evidence of an agreement exists, the Company
has delivered all the elements under the agreement, and collection of amounts
under the agreement is probable. In accordance with the existing license
agreement, revenue will not be recognized until clinical and sales milestones
have been achieved, and collection is probable.

NOTE 6. LITIGATION LIABILITY

The Company is a defendant in a lawsuit filed by a prospective investor
alleging breach of contract, which seeks damages totalling $25,000. The Company
believes the suit is without merit, however, to remain conservative, the entire
claim has been accrued in the financial statements.

Subsequent to March 31, 2006 the Company received notice that the claim has
been dismissed and is no longer outstanding. Upon receipt of court documentation
this liability will be reversed.

NOTE 7. COMMON STOCK

The Company is authorized to issue 250,000,000 shares of
common stock. As of March 31, 2006, there remains issued and outstanding
57,508,112 shares of such common stock which has a stated par value of $0.0001
per share.

There were no shares issued during the six months ended March 31, 2006.
During the six months ended March 31, 2005, $520,347 of convertible promissory
notes were converted into 5,203,470 shares of common stock at $0.10 per share
and 10,406,940 warrants to purchase shares of common stock at an exercise price
of $0.30 per share.

NOTE 8. STOCK OPTION PLANS

The Company has a Stock Option Plan (the "Plan") under which
officers, key employees, certain independent contractors, and non-employee
directors may be granted options to purchase shares of the Company's authorized
but unissued common stock. This Plan was terminated during fiscal 2001. Under
this Plan, the option exercise price is $0.10. Outstanding stock options granted
under the Plan will remain in effect until the expiration date specified in
those options. Options currently expire no later than 10 years

9

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from the grant date and generally vest within five years. Proceeds received
by the Company from exercises of stock options are credited to common stock and
additional paid-in capital. Additional information with respect to the Plan's
stock option activity is as follows:

|                                                 | Number
    of | Weighted
|------------------------------------------------ | ------------- | --------
|                                                 | Shares        | Average 
|                                                 |               | Exercise
|                                                 |               | Price   
|Options outstanding
    and exercisable at March |               |         
|31, 2006                                         | 1,150,000     | $0.10   

The Company adopted a new option plan on February 10, 2003 under which
options to purchase 1,500,000 common shares will be granted to certain key
employees, consultants and directors. Under the Plan, the option exercise price
and its fair market value are determined to be $0.50 -$0.69. All options will
expire on February 10, 2008 and will vest, and become exercisable in three
instalments. Proceeds received by the Company from exercises of stock options
are credited to common stock and additional paid-in capital. Additional
information with respect to the Plan's stock option activity is as follows:

|                                                     | Number
    of | Weighted
|---------------------------------------------------- | ------------- | --------
|                                                     | Shares        | Average 
|                                                     |               | Exercise
|                                                     |               | Price   
|Outstanding at
    February 10, 2003 (plan adoption) | 0             |         
|Granted during fiscal
    2003                       | 645,000       | $0.63   
|Exercised                                            | 0             | $0.00   
|Cancelled                                            | 75,000        | $0.63   
|Outstanding as of
    March 31, 2006                 | 570,000       | $0.63   
|Options exercisable at
    March 31, 2006            | 570,000       | $0.63   

The Company granted 645,000 stock options to consultants
during fiscal 2003. We recognized $280,594 in administrative expenses related to
the granting of these options during fiscal 2003. The fair value of each option
granted during 2003 was determined using the Black-Scholes Option Pricing
Method.

The Company did not grant any stock options during fiscal
2004. The Company, via written consent from a majority of the holders of common
stock, approved the adoption of a new option plan during July, 2004. Under this
plan the Company can issue up to 24,000,000 options to purchase common stock.
Under this plan the Company granted the following options to employees and
consultants during fiscal 2005 and during the first quarter of fiscal 2006
ending December 31st, 2005:

|                                                 | Number
    of | Weighted
|------------------------------------------------ | ------------- | --------
|                                                 | Shares        | Average 
|                                                 |               | Exercise
|                                                 |               | Price   
|Outstanding at July
    24, 2004 (plan adoption) | 0             |         
|Granted during fiscal
    2004                   | 0             |         
|Granted during fiscal
    2005                   | 20,710,000    | $0.16   
|Granted during Q1,
    fiscal 2006               | 3,290,000     | $0.075  
|Exercised/Cancelled                              | 0             |         
|Outstanding as of
    March 31, 2006             | 24,000,000    | $0.15   
|Options exercisable at
    March 31, 2006        | 20,710,000    | $0.16   

10

---



Additional information with respect to the Plan's stock option activity is as
follows:

|Grant Date | Quantity   | Option | Expiry  | Fair Value | Risk   | Expected | Expected   | Expected
|---------- | ---------- | ------ | ------- | ---------- | ------ | -------- | ---------- | --------
|           | Granted    | Price  |         |            | Free   | Life     | Volatility | Dividend
|           |            |        |         |            | Rate   |          |            |         
|Nov 15,    | 13,220,000 | $0.15  | Nov 15, | $1,448,922 | 2.32%  | 10       | 185%       | NIL     
|2004       |            | to     | 2014    |            |        | years    |            |         
|           |            | $0.50  |         |            |        |          |            |         
|Jan 10,    | 7,000,000  | $0.15  | Feb 8,  | $1,045,056 | 2.02%  | 10       | 177%       | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|Feb 8,     | 390,000    | $0.15  | Feb 8,  | $53,894    | 1.93%  | 10       | 156%       | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|May 25,    | 100,000    | $0.13  | May 25, | $7,627     | 2.00%  | 10       | 70%        | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|Oct 17,    | 3,290,000  | $0.075 | Oct 17, | $244,559   | 4.50 % | 10       | 75%        | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|           | 24,000,000 |        |         | $2,800,058 |        |          |            |         

Of these options, 600,000 which were granted to consultants vest immediately,
and the remaining 23,400,000 have vested or will vest on the first anniversary
of the grant date.

A majority of shareholders approved the 2006 Option Plan at the Annual
General Meeting held March 29, 2006. Under this Plan up to 5,000,000 options may
be granted. As of March 31, 2006 no options have been granted under the 2006
Option Plan.

The Company has adopted the fair value accounting for employee stock options
as per SFAS 123(R) using the modified retrospective application method,
effective April 1, 2005. The Company recorded $1,139,455 in stock based
compensation expense during the six months ended March 31, 2006 ($54,673 for the
six months ended March 31, 2005). The Black-Scholes option pricing model was
used to calculate this expense.

There remains $133,335 in stock compensation to be expensed over the vesting
period of these outstanding options.

Had the Company continued to use APB 25, and not reflected employee stock
based compensation expense, net loss and net loss per share both pre-tax and
after tax basis would have been as follows:

|                                     | As
    reported using | Pro
    Forma per
|------------------------------------ | --------------------- | -----------------
|                                     |                       |                  
|                                     | SFAS
    123(R)       | APB 25           
|                                     |                       |                  
|Stock Based
    compensation         | $
    607,664         | $
    111,224    
|                                     |                       |                  
|Net Loss
    (pre-tax/after tax)     | $(1,741,027)          | $(1,244,587)     
|                                     |                       |                  
|Basic and Diluted Loss
    per share | $(0.03)               | $(0.02)          

NOTE 9. WARRANTS

The Company has the following warrants outstanding to purchase common stock
at March 31, 2006:

11

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|Warrants issued in
    conjunction with financing costs whereby one   |           
|--------------------------------------------------------------------- | ----------
|warrant entitles the
    holder to purchase one share of common stock |           
|at an exercise price
    of $1.10, expiring December 19, 2007.        | 670,275   
|                                                                      |           
|Warrants issued in
    conjunction with financing costs whereby one   |           
|warrant entitles the
    holder to purchase one share of common stock |           
|at an exercise price
    of $0.65 expiring June 17, 2006.             | 75,524    
|                                                                      |           
|Warrants issued in
    return for financial advisory services whereby |           
|one warrant entitles
    the holder to purchase one share of common   |           
|stock at an exercise
    price of $0.05, expiring September 1, 2007.  |           
|This warrant can only
    be exercised after January 29, 2005.        | 3,000,000 
|                                                                      |           
|Warrants issued in
    conjunction with financing costs whereby one   |           
|warrant entitles the
    holder to purchase one share of common stock |           
|at an exercise price
    of $0.15, expiring September 1, 2007.        | 2,994,642 
|                                                                      |           
|Warrants issued in
    conjunction with financing costs whereby one   |           
|warrant entitles the
    holder to purchase one share of common stock |           
|at an exercise price
    of $0.30, expiring September 1, 2007.        | 2,287,669 
|                                                                      |           
|Warrants issued in
    conjunction with conversion of promissory      |           
|notes and in
    conjunction with the private placement completed     |           
|during July and
    September, 2004. One warrant entitles the holder  |           
|to purchase one share
    of common stock at an exercise price of     |           
|$0.30. Expiry dates:
    July 21, 2007  27,505,378; September 1,     |           
|2007  12,426,114;
    October 13, 2007  5,204,160.                  | 45,135,652
|                                                                      |           
|Warrants issued in
    conjunction with the issuance of Promissory    |           
|Notes during February,
    2006. One warrant entitles the holder to   |           
|purchase one share of
    common stock at an exercise price of $0.10, |           
|expiring February 13,
    2008.                                       | 1,577,453 
|                                                                      |           
|Warrants issued in
    conjunction with the issuance of Promissory    |           
|Notes during March,
    2006. One warrant entitles the holder to      |           
|purchase one share of
    common stock at an exercise price of $0.10, |           
|expiring March 31,
    2008                                           | 3,182,000 
|                                                                      | 58,923,215

NOTE 10: SUBSEQUENT EVENTS

During April, 2006 the Company signed a License Agreement with Proprius
Pharmaceuticals Inc. ("Proprius"). Under the terms of the agreement, Proprius
will undertake completion of clinical trials for Indaflex at their cost, and
will have exclusive global rights (except for Asia and Mexico) to sell and or
sublicense Indaflex and any successor NSAID products developed by us. The
Company will receive clinical and sales milestone payments as well as royalties
based on net sales of Indaflex. Payments are contingent upon successful
completion of clinical trials, FDA and European Union approvals, and successful
commercialization of the products.

During April, 2006 the Company signed a term sheet with New Super Limited ("NSL")
to allow NSL to purchase up to 25% of the outstanding common shares of AlphaRx
International Holdings Ltd. ("AIH")  a wholly-owned subsidiary of the Company.
In conjunction with the term sheet, NSL made a non-refundable payment of
$100,000 to AIH.

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On May 1, 2006 the Company entered into a new Joint Venture ("JV") agreement
with a leading mainland Chinese marketing company for the purpose of
manufacturing, marketing and distributing AIH's line of pharmaceutical and over
the counter consumer health products in Asia. The Chinese company has agreed to
fund the JV with working capital of RMB 250 million (about USD$31 million). AIH
has agreed to license certain products and to develop novel branded generic
products in lieu of a capital contribution to the JV. As a result the JV will
issue to AIH shares equivalent to 30% of its total issued and outstanding common
stock. AIH will also receive a royalty of 5% on all gross sales generated by the
new JV.

The Company has issued an additional CAD $50,000 in promissory notes
subsequent to March 31, 2006 for working capital purposes. These Promissory
Notes bear interest at the rate of 12% per annum and are due on the first
anniversary date of issuance. Prepayment of these notes prior to the first
anniversary date is permitted.

NOTE 11: RECLASSIFICATIONS

Certain amounts in prior year's financial statements have been restated to
conform to current year presentation.

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
OF OPERATION

The following discussion and analysis should be read in conjunction with the
Financial Statements, including the Notes thereto, appearing in this Form
10-QSB. Except for the historical information contained herein the foregoing
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those projected
in the forward-looking statements discussed herein.

General

AlphaRx is a drug delivery company specializing in the development of
innovative therapeutic products for the pharmaceutical and consumer health care
market. Our core competence is in the development of novel drug formulations for
therapeutic molecules or compounds that have exhibited poor gastro intestinal
absorption due to poor solubility or have yet be administerable to the human
body with an acceptable delivery method. Our drug delivery system is versatile
and offers significant flexibility in the development of suitable dosage
formulations (i.e. oral, topical or parenteral) to meet the requirements of
specific drug molecules.

The costs incurred for individual research and development initiatives to
date cannot be readily determined because (i) there is no clear distinction
between initiatives in order to be able to differentiate between them; (ii) all
initiatives have a common goal and that is to adopt our Bioadhesive Colloidal
Dispersion drug delivery system to the specific drug in order to improve that
drug's effectiveness; and (iii) we do not maintain a time control system to
differentiate research and development activities between similar initiatives.

The nature, timing and estimated costs to complete a research and development
initiative and anticipated completion dates cannot be estimated because: (i) the
nature of research is experimental and we could encounter unforeseen situations
which could significantly delay project completion or require us to abandon the
project; (ii) timing to complete a research initiative depends, to a certain
extent, on financial resources and we cannot predict with any degree of
certainty that financial resources will be available when needed to complete any
specific initiative and (iii) cost estimates cannot be predicted with any
acceptable degree of accuracy due to unforeseen issues arising during the
clinical stages or the approval stages of any specific initiative.

If we cannot complete our research and development initiatives on a timely
basis consequences to our operations could be significant to the point where the
initiative would be delayed or even abandoned. We would also face the risk of
competitors developing the same or similar products and being first to market.
Finally, our failure to develop products on a timely basis could substantially
impair our ability to generate revenues and materially harm our financial
position.

We cannot predict the timing of material net cash inflows from significant
initiatives due to a number of factors including (i) availability of financial
resources required to market a new product either directly or via a partner,
(ii) our lack of experience in bringing a new product to market successfully and
gaining market share; (iii) competitors' products and the nature and timing of
their marketing initiatives.

We intend to continue investing in the further development of our drug
delivery technologies and to actively seek collaborators and licensees to
accelerate the development and commercialization of products incorporating our
drug delivery systems. Depending upon a variety of factors, including
collaborative arrangements, available personnel and financial resources, we will
conduct or fund clinical trials on such products and will undertake the
associated regulatory activities.

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During 2003 we initiated commercialization of our products commencing with
sales of Flexogan in the Canadian market. It became evident during 2005 that we
required substantial additional financial resources to pursue our Flexogan
marketing strategy. We determined that completion of Phase II clinical trials
was the best course of action with the resources remaining. Should we be
successful in raising additional funding we will continue to pursue completion
of Phase II trials as our primary objective.

We signed a licensing agreement with Andromaco in August 2003
for the commercialization of our lead pharmaceutical product "Indaflex" in
Mexico. Mexican health authorities gave approval to Andromaco to start sales of
Indaflex in Mexico. We collected our first royalties from Indaflex sales in the
year ended September 30, 2005. Royalties continue to flow into the Company based
on sales generated in Mexico by Andromaco.

Recent Developments

We established a wholly-owned subsidiary  AlphaRx International Holdings
Limited in April, 2005 and entered into a Joint Venture Agreement with Basin
Industrial Limited (a wholly-owned subsidiary of Advance Pharmaceutical Co.
Ltd.). The joint venture  AlphaAP Inc., will be involved in the manufacture and
marketing of certain existing and future products in the far east.

We have one pharmaceutical drug  Indaflex - in the clinical trial stage
(Phase 1 completed in March, 2005, Phase II underway as of November, 2005), and
several pharmaceutical drugs in the preclinical stage.

We signed a License Agreement with Proprius Pharmaceuticals Inc. ("Proprius")
during April, 2006. Under the terms of the agreement, Proprius will undertake
completion of clinical trials for Indaflex and will have exclusive global rights
(except for Asia and Mexico) to sell and or sublicense Indaflex and any
successor NSAID products developed by us. Should clinical trials for Indaflex be
successful and sales commence, we will receive clinical trial completion
milestone payments and sales milestone payments of up to $116 million. In
addition, we will receive royalty payments on sales of Indaflex by Proprius, its
affiliates and its sublicensees.

Our wholly-owned subsidiary  AlphaRx International Holdings Ltd. ("AIH")
signed a term sheet with New Super Limited ("NSL") during April, 2006 for the
purpose of funding AIH's business developments and commercialization of its
licensed products in Asia. Under the terms of the agreement NSL has agreed to
subscribe to AIH's shares for up to 25% of its fully diluted common stock for an
aggregate consideration of approximately $2.5 million. Of this amount $100,000
has been paid. AIH will no longer be wholly-owned by us upon the infusion of
funds from NSL.

On May 1, 2006 we announced that AIH has entered into an agreement with China
Lianyungang City Golden Enterprises Limited ("China Party") to establish a Joint
Venture company in mainland China. The Joint Venture intends to establish a
manufacturing facility in Lianyungang City, Jiangsu Province and a distribution
network in order to manufacture and market pharmaceutical products licensed by
AIH. In addition AIH will help to develop branded generic products in lieu of
capital payment into the Joint Venture. China Party has agreed to inject working
capital of RMB 250 million (approximately $31 million) into the Joint Venture in
the form of equity. AIH will own 30% of the Joint Venture common stock and China
Company will own 70%. AIH is also to receive a 5% royalty on all sales generated
by the Joint Venture.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2006, AS COMPARED TO
THE SIX MONTHS ENDED MARCH 31, 2005

The Company incurred a net loss of $1,741,027 for the six month
period ended March 31, 2006 as compared to a loss of $1,255,778 incurred for the
same period a year ago, an increase of $485,249 or approximately 39%. The
increase stems primarily from an increase in stock based compensation expense of
$552,991 when compared to the previous period. We are also focusing on research
and development activities related primarily to clinical trials of Indaflex and
preclinical activities for various new formulations. We are no

15

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longer actively marketing Flexogan due to financial constraints and
increasing competition in the pain relief segment of the market.

Revenues

Revenues consist of Flexogan sales as well as license fees and royalties.
Total revenues for the six month period ended March 31, 2006 were $129,187 as
compared to $25,146 generated for the same period a year ago, an increase of
$104,041 or about 413%. We recognized (and collected) $100,000 in license fees
for the first time in our history, as well as generating $7,184 in Indaflex
royalties. These two revenue streams account for virtually the entire increase
in revenues. Flexogan sales decreased to $22,003 for the six months ended March
31, 2006 from $25,146 generated in the same period a year ago. Sales of Flexogan
continue, however, we are no longer marketing the products and anticipate sales
to diminish over the coming months.

Gross Margin

Cost of Sales for the six months ended March 31, 2006 was $8,919 as compared
to $11,079 incurred for the same period a year ago. Resulting Gross Margin
increased to $120,268 or approximately 93% of sales as compared to Gross Margin
of $14,067 or approximately 56% of sales for the same period a year ago.
Excluding royalties and license fees, our gross margin for the six months ended
March 31, 2006 was $13,084 or 59% of sales. There are presently no direct costs
related to the generation of license fees and royalties.

General and Administrative Expenses

General and Administrative expenses consist primarily of personnel costs
related to general management functions, finance, inventory logistics, office
overheads, as well as insurance costs and professional fees related to legal,
audit and tax matters. General and Administrative expenses for the six months
ended March 31, 2006 were $369,313 as compared to $307,277 incurred for the same
period a year ago, an increase of $62,036 or approximately 20%.

Included in this expense category for the six months ended March 31, 2006 was
the write off of existing Flexogan inventory in the amount of $72,366 with no
comparable expense in the same period a year ago. As Flexogan is no longer being
actively marketed, and to date there has been no success in sourcing an active
partner to market this product, the value of the inventory was impaired, causing
this write off.

Stock Based Compensation Expense

We decided to adopt fair value accounting for employee stock options as per
SFAS 123(R) using the modified retrospective application method, effective April
1, 2005. As a result we expensed $607,664 in stock based compensation during the
six months ended March 31, 2006 as compared to $54,673 during the same period a
year ago. There remains $589,671 in stock based compensation to be expensed over
the vesting period of the options granted and over the life of the promissory
notes and the warrants issued in conjunction with these promissory notes.

Research and Development Expenses

Research and development expenses include costs for scientific personnel,
supplies, equipment, outsourced clinical and other research activities.

Research and development expenses for the six months ended March 31, 2006
were $807,415 as compared to $481,388 incurred for the same period a year ago,
an increase of $326,027 or about 68%. The increase relates primarily to Phase II
Indaflex clinical trials being undertaken, and ongoing research and development
of other over the counter products. We anticipate a reduction in research and
development expenses during the next quarter primarily due to the license
agreement signed with Proprius. Under the terms of the agreement Proprius covers
the cost prospectively, of present and future clinical trials related to
Indaflex  the

16

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only drug undergoing clinical trials at this time. Beyond our next quarter,
research and development expenses may increase depending on the availability of
financial resources among other factors.

Sales and Marketing

We determined to curtail sales and marketing expenditures for Flexogan based
on increasing competition in the pain relief segment of the market and our
available financial resources. Sales and marketing expenditures were $32,845 for
the six months ended March 31, 2006 as compared to $419,576 incurred during the
same period a year ago, a decrease of $386,731 or about 92%.

Depreciation

Depreciation totalled $33,079 during the six months ended March 31, 2006 as
compared to $25,018 incurred during the same period a year ago, an increase of
$8,061 or about 32%. The increase stems from additional capital expenditures
incurred during the latter half of fiscal 2005 which in turn resulted in
additional depreciation expenses. There were no capital expenditures during the
six month period ended March 31, 2006.

Loss from Operations

Loss from operations were $1,730,048 for the six months ended March 31, 2006
as compared to a loss of $1,273,865 incurred for the same period a year ago, an
increase of $456,183 or approximately 36%. Stock based compensation expense of
$607,664 for the six months ended March 31, 2006 as compared to $54,673 incurred
during the same period a year ago (an increase of $552,991) was primarily
responsible for the increase in loss from operations. The reduction in marketing
expenses was generally offset by an increase in research and development
expenses during the six months ended March 31, 2006.

Interest Income/Expense

Net Interest expense for the six month period ended March 31, 2006 was
$10,979 as compared to net interest income of $18,087 generated during the same
period a year ago. We exhausted funds raised from a private placement during our
first fiscal quarter in 2006, necessitating the issuance of interest bearing
promissory notes. During the first six months of fiscal 2005 we still had a
positive cash balance stemming from a private placement completed the previous
year.

LIQUIDITY AND CAPITAL RESOURCES

As at March 31, 2006 the Company had a working capital deficiency of
$(719,080) compared to a working capital deficiency of $(75,925) as at September
30, 2005. We issued approximately $469,000 in promissory notes during the six
months ended March 31, 2006 and intend to continue to issue such promissory
notes until we can source more permanent funding. We have issued additional
financing in the form of promissory notes in the amount of CAD $50,000
subsequent to March 31, 2006. These notes are repayable within one year and bear
interest at 12% per annum. We also issued warrants in conjunction with these
promissory notes.

Since inception, we have financed operations principally from the sale of
Common Stock and issuance of promissory notes and expect to continue this
practice to fund our ongoing activities.

We currently do not have sufficient resources to complete the
commercialization of any of our proposed products or to carry out our entire
business strategy. Therefore, we will likely need to raise substantial
additional capital to fund our operations in the future. We cannot be certain
that any financing will be available when needed on acceptable terms or at all.
Any additional equity financings will be dilutive to our existing shareholders,
and debt financing, if available, may require additional stock to be issued
and/or involve restrictive covenants on our business.

17

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We expect to continue to spend capital on:

1. research and development programs;
2. preclinical studies and clinical trials;
3. regulatory processes; and
4. third party licensees and distribution partners to manufacture and market
  our products for us.

The amount of capital we may need will depend on many factors, including:

1. the progress, timing and scope of our research and
  development programs;
2. the progress, timing and scope of our preclinical studies
  and clinical trials;
3. the time and cost necessary to obtain regulatory approvals;
4. the time and cost necessary to establish or to retain sales and marketing
  partners to market our products;
5. the time and cost necessary to respond to technological and market
  developments; and
6. new collaborative, licensing and other commercial relationships that we
  may establish.

The inability to raise capital would have a material adverse effect on the
Company. We currently have no capital commitments other than the payment of rent
on our facilities lease, and for certain research equipment.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain of the information contained in this document constitutes
"forward-looking statements", including but not limited to those with respect to
the future revenues, our development strategy, involve known and unknown risks,
uncertainties, and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the risks and uncertainties associated with a
drug delivery company which has not successfully commercialized our first
product, including a history of net losses, unproven technology, lack of
manufacturing experience, current and potential competitors with significant
technical and marketing resources, need for future capital and dependence on
collaborative partners and on key personnel. Additionally, we are subject to the
risks and uncertainties associated with all drug delivery companies, including
compliance with government regulations and the possibility of patent
infringement litigation, as well as those factors disclosed in our documents
filed from time to time with the United States Securities and Exchange
Commission.

ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer and Principal Accounting Officer,
has evaluated the effectiveness of the Company's disclosure controls and
procedures as of March 31, 2006. The Company's Chief Executive Officer and Chief
Financial Officer and Principal Accounting Officer concluded that the Company's
disclosure controls and procedures are effective for gathering, analyzing and
disclosing the information the Company is required to disclose in the reports it
files under the Securities Exchange Act of 1934, within the time periods
specified in the SEC's rules and forms.

18

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PART II: OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

Farhad Walji vs. AlphaRx, Inc. and AlphaRx Canada Limited filed in the
Supreme Court of British Columbia on August 23, 2002. Farhad Walji has filed a
claim asking for $25,000 plus interest for allegedly providing $20,000 pursuant
to a subscription agreement to purchase common shares of AlphaRx's stock and
damages resulting from lost opportunity. We have been informed by the courts
during April, 2006 that this case has been dismissed and is no longer
outstanding. Upon receipt of court documentation the liability will be reversed.

ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES

We did not issue any stock during the three and six month periods ending
March 31, 2006. We did issue warrants to purchase 4,759,453 shares of common
stock in conjunction with the issuance of promissory notes during the three
months ended March 31, 2006. These warrants entitle the holder to purchase
common stock at $0.10 per share and expire in February and March, 2008.

We did not issue any securities during the three months ended March 31, 2005.
During the three months ended December 31, 2004 we issued 5,203,470 shares of
common stock pursuant to the conversion of $520,347 in convertible debt. We also
issued warrants to purchase 10,406,940 shares of common stock at $0.30 per share
in connection with the conversion of debt.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 - OTHER INFORMATION

None.

ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS.

31.1 Certification of C.E.O. Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. 
31.2 Certification of C.F.O. Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. 
32.1 Certification of Michael Lee pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code. 
32.2 Certification of Marcel Urbanc pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code.

(b) REPORTS ON FORM 8-K

On April 19, 2006 we reported on a press release regarding a license
agreement that we entered into with Proprius Pharmaceuticals, Inc. Under the
agreement, we will receive an upfront payment of $1 million and will be eligible
to receive additional clinical and sales milestone payments of up to $116
million for the successful development and commercialization of Indaflex, as
well as royalties on all future sales.

19

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On May 3, 2006 we reported on a press release regarding a joint venture
agreement entered into between our wholly owned subsidiary  AlphaRx
International Holdings Ltd and China Lianyungang City Golden Enterprises Limited
("China Party") to establish a Joint Venture company in mainland China. The
China Party has agreed to provide funding of up to RMB 250 million (about $31
million) to establish a manufacturing facility and a distribution network in
order to produce and market certain products and to develop new novel branded
generic products in China.

SIGNATURES:

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

DATED: May 12, 2006

ALPHARx, INC.By: __/S/ Michael M. LeeMichael M. Lee, Chief Executive
      OfficerDirectors:By: __/S/ Michael M. LeeMichael M. Lee, DirectorBy: __/S/ David MilroyDavid Milroy, DirectorBy: __/S/ Ford MooreFord Moore, Director


20

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